Banco de Sabadell SA

MAD:SAB

Earnings Call Transcript 2018-Q3

[Cecilia Romero, Head of Investor Relations]

Good morning, everyone, and welcome once again to Sabadell's results webcast. My name is Cecilia Romero. I'm Head of Investor Relations. And today, we will be presenting our third quarter results. As usual, we are here today with our management team. We have with us our CEO, Mr. Jaime Guardiola; and our CFO, Mr. Tomás Varela. Good morning, Mr. Guardiola. The floor is yours.

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Thank you, Cecilia. Good morning, everybody, and thank you for joining our results webcast. Well, our presentation today will follow a similar structure to previous quarters. I will start by giving you our highlights for the quarter. I will then discuss our profitability and commercial activity results as well as our commercial transformation progress. And finally, Tomás will discuss asset quality and solvency. Well, so let me begin by highlighting the main developments driving our results this quarter and providing some information on some key elements of our performance going forward. First of all and very important, our core banking business has continued to show a strong performance in the quarter, delivering robust volume growth. Both growth on performing loans grew by 1.9% and 5.4% year-on-year, respectively, and ex-TSB. This very good volume's performance, together with our strong results in fees, which are up 10.8% year-on-year ex-TSB, have driven our core banking revenues which, in turn, have increased by 1.3% compared to the previous quarter and by 3.7% year-on-year ex-TSB. Also, we have continued to de-risk our balance sheet and to improve our asset quality profile this quarter. Regarding NPAs, the organic reduction that is excluding institutional sales in the quarter amounted to EUR 244 million. And our NPL ratio adjusted to account for the institutional sales announced in July was down more than 18 basis points to 4.3%. In relation to the institutional NPA sales announced last quarter, we can confirm that we expect EUR 153 million of annual savings. 85% of these savings will impact provisions and impairments while the remaining savings will go through amortizations and other operating results. It is important to note that these annual savings are calculated assuming the potential sale of Solvia. Otherwise, the savings would increase to EUR 209 million. Net profit was impacted in the quarter by post-migration one-off items in TSB amounting to EUR 88 million mostly related to increased resource and legal cost. In the fourth quarter, one-off charge to cover the final post-migration cost will be limited to EUR 30 million. This will bring the total and final cost of the post-migration issues to EUR 320.9 million. Looking ahead, we expect commercial activity to increase in TSB from the beginning of 2019 once all products, including an SME product offering, are available in this -- in its different channels. Overall, good net profit for the first 9 months of 2018 amounted to EUR 248 million. Net profit ex-TSB and excluding one-off items was EUR 592 million year-to-date, an increase of 8.3% compared to last year. I would like to comment briefly on the latest developments in relation to the Spanish mortgage tax. Our view in this regard is that Sabadell has acted according to the 1995 tax rule that specified that the tax on mortgages has to be paid by the customer. This law has not been left void and without effect by last week's Supreme Court ruling. However, we expect no retroactive impact since we have been complying with the tax law that was enforced at the time of the transactions. And finally, I would like to inform you that our board approved -- has approved an interim dividend of EUR 0.02 per share in line with last year's interim dividend. Now let's move on to our quarterly profitability and efficiency highlights. In terms of volumes, we have confirmed that we have reached a turning point in gross loans, which are growing year-on-year for the second quarter in a row. Gross loans were up 1% year-on-year for the group and 1.9% ex-TSB, and performing loans were up 3.1% year-on-year for the group and 5.4% ex-TSB. Overall, we saw strong core bank revenue for the group, it was up by 4.4% in the quarter and 2.2% in the year. Next, net interest income performed well, ex-TSB, despite seasonality, increasing by 1.1% quarter-on-quarter and even better at the group level, growing by more than 4%, thanks to lower remedies costs in TSB compared to the previous quarter. Fees and commissions performed remarkably well, growing by 8.7% for the group and 10.8% ex-TSB year-on-year. This next slide shows the income statement for the quarter on a like-for-like basis. Net profit in the quarter was EUR 127 million, including TSB migration related one-offs, which, as I mentioned before, amounted to EUR 88 million. The impact of these one-offs translated into 4.8% million (sic) [ EUR 4.8 million ] in NII, EUR 1.7 million in fees, EUR 17.7 million relating to fraud in the other operating income, and finally, EUR 63.5 million related to additional resources and legal advisers in operating costs. Excluding these one-offs, net profit for the group in the third quarter was EUR 190 million, which is 26.4% more than the previous quarter. And year-on-year, net profit for the group, excluding one-offs, grew by 14.7%. In this slide, we show the quarterly evolution of net interest income, which, ex-TSB, increased by 1.1% compared to the previous quarter, driven by strong volumes and the lower cost of liquidity. In addition, TSB contributions to NII increased considerably by 1 -- 11.5% in the quarter as the cost of customer remedies decreased quarter-on-quarter. Excluding remedies, NII and TSB, it remains stable. Overall, group NII increased by 4.1% in the quarter or by 0.9% when excluding the positive impact of TSB's lowest remedies costs. This following slide shows the evolution of net interest margin, which, excluding the impact of TSB one-offs, remained broadly stable in the quarter, helped by higher loan revenue and lower liquidity costs. In TSB, net interest margins, including one-offs, increased by 4 basis points to 28%, mostly due to the effect of the Bank of England base rate increase. Customer spread, ex-TSB, fell by 5 basis points to 2.67% due to the higher volume growth in lower-yielding segments during the quarter, some pressure from Euribor repricing and the higher cost of foreign currency deposits. At the group level, the customer spread increased by 5 basis points to 2.73% as TSB remedies were lower in the quarter. Now let's move into the evolution of -- and breakdown of fees and commissions, which recorded a very, very good performance, driven by strong commercial activity. Compared with the previous quarter, commissions were up by 1.8% ex-TSB, a strong performance taking into account seasonality. For TSB, commissions have more than doubled quarter-on-quarter coming from a relatively low base. The increase was mainly due to the end of plusness campaign, higher international payment fees as well as lower customer remedies commercial actions. In the year, fees and commissions grew by 8.7% for the group, 9.4% for the group excluding TSB customer remedies and by 10.8% ex-TSB. Regarding expenses. As I mentioned earlier, this quarter, our operating cost line has been impacted by EUR 63.5 million of nonrecurring expenses related to TSB post-migration issues. Excluding these one-off items, group recurring costs were down 1.1% quarter-on-quarter due to lower payments ex-TSB has completed the migration to its new IT platform. Ex-TSB costs were relatively stable in the quarter. Well, we'll now move on to commercial activity and transformation. As I highlighted before, the commercial performance of our banking business across the group continues to show encouraging dynamism. In Spain, we delivered strong commercial results with performing loans, increasing by 0.3% ex-TSB and 0.1% in Spain in the quarter despite seasonality. This performance was supported by strong mortgage generation and positive volume growth in the corporate segment. In the year, we continue to outperform in the most profitable segments, SMEs and corporates growing at rates of over 5% and 6%, respectively, which is simultaneously defending yields. At TSB, we saw stable balance sheet trends in the quarter with growth in current accounts of 0.8% quarter-on-quarter and 6.5% in the year. Net lending, excluding Whistletree portfolio, was down 1% quarter-on-quarter and increased by 1.5% year-on-year. This is below our initial plan due to the limitations on commercial activity produced by the IT migration issues. In Mexico, we continue to see sustained growth in customer lending, with 1.1% growth in performing loans volume during the quarter, while customer funds continue to grow, representing a twofold increase year-on-year. In the next slide, you have a more detailed breakdown of the evolution of customer loans and funds. Let me highlight that on the liability side, we registered a small decrease in customer funds quarter-on-quarter, both at group and ex-TSB level as we had some saving products expiring in the quarter. Also, it is worth noting that our wholesale funding increased in the quarter after the successful placement of EUR 750 million of senior preferred debt. Our balance sheet funds also show a more positive evolution in the quarter and grew by 0.6%, which was mainly driven by mutual funds and third-party insurance products. Looking at the performing loans by region, including the impact of FX. You can see that this quarter, growth was mostly driven by the strong performance of Spain and Mexico. Spain grew by 0.1%, 4.5% in the year; while Mexico grew 6.2% quarter-on-quarter and 44.9% year-on-year. TSB volumes fell by 2%, 3.6% in the year, as the bank slowed down the loan application pipeline due to migration. Overall, group performing loans, excluding the APS NPL portfolio which is in runoff, were down slightly in the quarter and grew 3.1% in the year. The following slide shows the breakdown of performing loans ex-TSB, including the impact of FX and ex-APS runoff by customer segment. As you can see, the corporate segment has performed very well in the quarter, growing by 5% compared to June. Mortgages to individuals were also up by 1.2% quarter-on-quarter and this was the strongest quarterly performance for this product in recent years. And SMEs volumes were down quarter-on-quarter, impacted by seasonality but grew by 5.4% compared to the previous year. Regarding pricing. We have continued to defend spreads despite some negative effects from Euribor repricing. Overall, yields on mortgage SMEs and corporates remain relatively flat, while customer -- consumer loans decreased quarter-on-quarter. Looking at commercial activity in Spain. Our performance continued to be very positive across segments. As I mentioned before, we continue to show strong growth in new lending in both companies and individuals. Also, we have achieved double-digit growth rates in all relevant commercial areas such as Expansion accounts, credit cards, point-of-sale turnover and insurance. This positive performance is reflected, once again, in market shares increases. As you can see, since the start of the year, we have increased our market shares in both customer loans and customer funds. In addition, we have continued to improve our shares year-on-year across products bought for both companies and SMEs. And I also would like to highlight the increase in SMEs market penetration. Currently, 52% of Spanish SMEs work with Sabadell, up 2 percentage points in the year. Key to sustaining this excellent commercial performance is our continuous focus on customer experience and service quality. In this regard, once again, we continue to beat the industry average in terms of quality of service, maintaining the gap between ourselves and the rest of the sector. And we continue to be at the top of the Accenture NPS ranking for both SMEs and large enterprises, where we achieved our best score ever. In the U.K., as I mentioned earlier, it is important to note that TSB slowed down the loan application pipeline to focus on migration, and we have consciously maintained subdued loan levels to focus on post-migration customer service. Therefore, net lending growth decreased by 1% in the quarter, excluding the Whistletree portfolio, but continued to increase year-on-year by 1.5%. On the liability side, current accounts growth was more pronounced in this quarter, increasing by 0.8% quarter-on-quarter and by 6.5% year-on-year. And saving deposits were down quarter-on-quarter, reflecting pricing decisions made in early 2018 to manage deposit volumes sold in 2018 Individual Savings Account season, given TSB's strong liquidity position. Moving on to Mexico. Our commercial activity continues to deliver impressive results. Customer loans grew by 47% year-on-year and customer funds more than doubled as a result of our focus on gathering deposits to balance the local funding app. During the quarter, we have also continued our commercial and digital transformation. As you can see in this slide, we show some of the key metrics that we used to track our progress. For example, digital and mobile customers were up 9% and 17%, respectively, year-on-year. Digital sales of unsecured loans increased by 67% year-on-year and commercial impacts based on business intelligence have increased by 36% compared to last year. To achieve these results, we are continuing to roll out new initiatives that leverage on technology to improve our digital offering and to simplify customer interactions with the bank, like the ones that you can see in this slide. In the field of alliances with digital players, in this quarter, we have reached an agreement with Alibaba to offer Alipay users in Spain the option to pay using Sabadell's point-of-sales terminals. And we are continuing to invest in technology ventures. During this quarter, we have acquired PayTPV, an Internet payment service provider for retailers; and we have invested in Antai, a venture builder, which has strong know-how in the launch of digital businesses.And with that, I finish my part of the presentation, and thank you, very much for your attention. And I will now hand over to Tomás who will explain to you the sections of solvency and asset quality.

[Tomás Varela Muiña, General Manager & CFO]

Thank you, Jaime. Well, if we refresh the main metrics of our risk profile improvement in the year. Again, we mentioned that the NPL ratio stands now at 4.3%; the net NPAs to total assets ratio stands at 1.7%, while the gross ratio is 5.5%; and our NPA coverage is circa 55%. The EUR 12 billion NPA sales, portfolio sales that we did, as we've mentioned, generates annual savings of EUR 153 million before taxes. That could be EUR 209 million if we retain Solvia. 15% of this, as we said, will appear through amortization and other operating results and the 85% will be seen in cost of risk. Taking this into account and further developments in cost of risk, the cost of risk ratio, the guidance for 2019 would be 45 basis points and 44 -- and 40 basis points for 2020, with potential improvement. We've seen a slight increase in the -- over the expected cost of risk this quarter due to idiosyncratic charges with some names, but the underlying trends continue to be favorable. The pace of organic reduction is significant. We see here that what we say -- what we call organic reduction has been EUR 244 million, this doesn't include the sales on the perimeter of the portfolio that were sold. If we add these, those sales were EUR 294 million in the quarter, which shows significantly strong sales trends in these kind of assets. From now on, sales in the perimeter of the sold portfolios will depend as well on the positioning of the owner of the portfolios. In terms of the capital position, as mentioned, pro forma, the CET1 stands at 11.2% and the reported is 11%. Here, we see the evolution of the ratio and the stability. It's worth mentioning that there is no risk coming from the ALCO portfolio exposure in Italy, since all the Italy's portfolios in -- is within the amortized cost portfolio and therefore, doesn't provide volatility on the ratio. On the other hand, going forward, our expectation is that in the coming quarters, the ratio will keep being behaving -- will keep behave -- will keep behaving stable. There are some potential negative impacts coming from TRIM effects that we expect to be offset by organic growth, organic capital generation and also, other positives related to disposal of assets and other changes in the balance sheet. We can see here the confirmation of a strong delivery on NPL improvements, both in terms of exposure and also in coverage. The total group NPL ratio is going below 4.5% and ex-TSB, is approaching 5%. The coverage kept increasing slightly and as it's done in the -- over the -- what -- all the quarters that we can see here. In terms of the evolution of the stock of NPAs, we, again, see a significant reduction both in NPLs and foreclosed assets. And in terms of the total NPA exposure, the reduction, pro forma in 12 months year-on-year, is EUR 9.3 billion, and is potentially approaching EUR 10 billion by the end of the year. Once again, here, we see the evolution of the volumes, also the coverages and the ratios of NPAs to total assets. The pace of reduction is remarkable and it continues, and the net ratio stands at, as mentioned, 1.7%. And the gross group ratio, as we can see here on the lower right-hand side, is 5.5% at the end of the quarter. The pro forma [ exit ] ratio at the end of this quarter is 55.7%. And as per TSB, we present here an snapshot of the asset quality and solvency metrics. They remain stable and are a really low-risk profile and the risk appetite in TSB is prudent. And the target product offer will be ready by the end of the year to receive growth, with -- we are seeing that the expected growth in 2019 hasn't happened as a result of the focus on migration and post-migration, but by the end of the year, the target product offer will be ready and growth will be resumed. And as we can see here and reminding the metrics, of course, loan-to-value on the mortgage stock is 44% at the end of the quarter. Buy-to-let is 15%, significantly below the U.K. average. CET1 is 19.5%, so it, as I said, is remarkably stable throughout the quarters. And here, I would end my part of the presentation. Thank you, Cecilia.

[Cecilia Romero, Head of Investor Relations]

Thank you, Tomás. We are going to open now the floor for a round of questions.

[Cecilia Romero, Head of Investor Relations]

And the first question goes to Mr. Guardiola. Well, we've seen very good performance in core banking business in Spain this quarter. Do you expect to maintain this performance throughout the year?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, yes, yes. As I've said in the presentation, in terms of volumes, ex-TSB, basically Spain, the figures are very robust, with positive growth in -- even in mortgages, 1%; and very significant increase in corporate and SMEs, 5% and 6%, respectively. We are doing this defending pricing. In our view, this trend is going to continue through the year, basically supported by the good performance of the Spanish economy. Obviously, there is some kind of expected deceleration, but in relative terms to other European economies, Spain is doing very well, so we are taking advantage of this good performance of the Spanish economy. At the same time, we are taking advantage of our, let's say, unique position in SMEs, in an ample vision of SMEs, meaning business, retailers, small companies, micro companies. I think that we are doing very well because we have a singular and a special offer for them and a very strong position in terms of market share. So we are very positive of the evolution of volumes. At the same time, we are doing well in terms of NII, more base volumes with a little bit pressure in margins. But in the other side, we are doing, I think, remarkably well in fees and commissions where, ex-TSB, we are year-on-year 10.8% up. I think that we can improve a little bit more this ratio for the full year. And also looking ahead, I think that in fees and commissions, we expect to be ahead of plan because the position is -- where we are in this moment is very strong. So I'm very positive to maintain even improve the performance of our banking business in Spain.

[Cecilia Romero, Head of Investor Relations]

Thank you very much, Mr. Guardiola. The next question goes to Tomás. For the second consecutive quarter, trading income has been mute. Could you please comment on the evolution?

[Tomás Varela Muiña, General Manager & CFO]

Yes. Well, it's important to take into account that trading income can be volatile across quarters, but also, it's worth reminding that we've already achieved EUR 246 million in trading in the year, and this is aligned with what we expected for the full year.

[Cecilia Romero, Head of Investor Relations]

Okay. Thank you very much. And the next question goes to you again, Tomás. We've seen the ALCO portfolio increasing in the quarter. Could you please comment on your strategy?

[Tomás Varela Muiña, General Manager & CFO]

After the sale of Italian bonds in the second quarter, we took actions to manage the portfolio and therefore, this increase has been seen in the third quarter. But we expect it to remain stable, both in terms of size and yield.

[Cecilia Romero, Head of Investor Relations]

Perfect. And the next question goes to you again, Tomás, regarding capital. You discussed a little bit on the presentation. But could you -- we have been asked to -- again, about the CET1 guidance for the coming quarters and what is driving the change?

[Tomás Varela Muiña, General Manager & CFO]

Yes. We've de-risked the balance sheet. As I mentioned in the presentation, the ratio stands -- the reported ratio stands at 11% and pro forma at 11.2%. We expect it to remain fairly stable across the coming quarters. The drivers will be organic RWAs growth, organic capital generation. Some impacts are likely in the coming quarters coming from TRIM. And as I said also, other management actions are related to disposal of assets and other changes in the balance sheet that will offset and maintain stable the ratio.

[Cecilia Romero, Head of Investor Relations]

Thank you. And the next question goes to Jaime. Could you please provide us with some color about the situation of the NPA transactions, please?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, the NPS transactions that we announced last quarter are in the process of authorizations, and we expected that to be closed during the first half of the year -- of the next year. This is a process that requires the authorization of different authorities, so I think that this could be -- our expectation is that to finish before the end of the first semester of next year.

[Cecilia Romero, Head of Investor Relations]

And the next one also for you, Mr. Guardiola. How confident are you of being awarded the RBS remedies in the U.K?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, we consider that we are a very strong candidate to these awards basically, because we have the best platform to serve SMEs. We have to convince the market that the platform that has been, let's say, a liability or because of the problems of the migration is now -- once we have recovered the normal activity, is a great asset to offer, to have the best offer to our customers. We consider we are also a very good candidate because we have the better footprint in terms of branches that match more with the offer of former Williams & Glyn in terms of our presence in England, Scotland and Wales. We have experience, including SMEs and small businesses, in this branch footprint, and I think that we are going to be one of the more strong candidates. We have prepared a very good offer. We are just in this moment completing the offer in all the channels in our platform. We have also had the experience in -- of Banco Sabadell in SMEs; that it's our DNA basically. And we can serve British SMEs in the better way that any competitor could do. So I think that we are strong candidates, and we are going to fight a lot to be one of the winners.

[Cecilia Romero, Head of Investor Relations]

Thank you. The next question goes to Mr. Varela. Why has the cost of risk this quarter been a bit higher than expected? Including the NPA savings, how do you expect your cost of risk to evolve?

[Tomás Varela Muiña, General Manager & CFO]

As I said, we had a few names this quarter that triggered some idiosyncratic charges and, therefore, this explains the small pickup in cost of risk. And going forward, a guidance will be 45 basis points in 2019 and 40 in 2020, with potentially some marginal improvement on this.

[Cecilia Romero, Head of Investor Relations]

Okay. Thank you very much. And the next question goes to Mr. Guardiola. Will you sell Solvia or/and Solvia Desarrollos Inmobiliarios?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, we have received interest -- investors' interest in Solvia and Solvia Desarrollos Inmobiliarios. We have told in any presentation that for us, this real activity -- real estate activity, servicer and development of real estate is not a core business, and we are interested in abstracting value of this transaction. So given this investors' interest and given the -- that most of the real estate's legacy of Banco Sabadell has been sold, we are considering selling these 2 assets.

[Cecilia Romero, Head of Investor Relations]

Thank you. And the next question goes to Mr. Varela. Why is the yield ex-TSB falling quarter-on-quarter? And can you also please comment on the evolution of deposit cost?

[Tomás Varela Muiña, General Manager & CFO]

Yes. In the quarter, we've loaned more in lower-yielding segments like mortgages and the corporates than in the other higher-yield segments. This has been particularly so in this quarter. Also, we had some negative Euribor repricing effect, and those are the 2 -- basically the 2 reasons. In terms of deposits, the evolution in our Mexican business is being remarkable and growth in deposits, significant. So the weight of those deposits has increased and there, of course, deposits -- the cost of deposits is higher and this explains the small pickup we've seen.

[Cecilia Romero, Head of Investor Relations]

Thank you, Tomás. The next question is also for you. What's your standard TLTRO II? And how do you plan to refinance it?

[Tomás Varela Muiña, General Manager & CFO]

The volume is now EUR 20.5 billion. First of all, I should mention that our position in cash and equivalents now is EUR 20 billion. We have an excess of liquidity, but also going forward is we need to remember that we have some EUR 4 billion in cash that should come from the development of our asset protection scheme. And also, with the TLTRO funding, we invested in some EUR 5 billion in assets that basically, have the same duration or maturity and are very similar. And also, we will be, of course, issuing MREL over the coming quarters, years. And finally, of course, one of our very viable sources of funding is the repo market that we are using at a relatively low level now.

[Cecilia Romero, Head of Investor Relations]

So one of the last points you made, the audience is also asking what are your MREL plans.

[Tomás Varela Muiña, General Manager & CFO]

We plan to tackle the unsecured debt market over the next -- over the coming quarters, as planned. So we -- no changes in our approach.

[Cecilia Romero, Head of Investor Relations]

Thank you. And also, Tomás, for you. The audience is asking obviously, they're having to -- they're asking whether you are planning to revise your business plan targets given the developments this year.

[Tomás Varela Muiña, General Manager & CFO]

We are -- our review of the targets is underway. We will take into account the developments that have happened this year basically. Of course, the additional savings that we've confirmed in this presentation related to the sale of the NPA portfolio. We've seen that credit volumes and core banking revenues in Spain remain very strong, so growth and the evolution is very strong. In terms of TSB, of course, we need to take into account that the -- as I mentioned in the presentation, the 2018 growth hasn't happened because of the focus in migration and post-migration. But growth will be resumed at the beginning of 2019. Therefore, we need to, as I said, take all these things into consideration in TSB, also the strategy of SMEs will be built into the review because it starts to be launched effectively now. So in what I mentioned, in terms of the target product deployment in TSB, to be ready by the end of this year. This includes an offer for SMEs, so this is already on. This hadn't been included in the previous plan as we disclosed at the time. And in terms of the inter-rate levels and their impact on the NII, this also is being followed for the moment. We are not that different from what we included in the plan and was disclosed. So there is a number of things that we are working on and, in due time, will be explained.

[Cecilia Romero, Head of Investor Relations]

Thank you very much. And the next question goes to Mr. Guardiola. In terms of dividend policy, do you confirm your 50% payout policy?

[Jaime Guardiola Romojaro, CEO, Managing Manager & Executive Director]

Well, yes, we are keeping our policy. But obviously, this is ultimately, a decision that has to be proposed by our board. But our intention is to keeping this policy.

[Cecilia Romero, Head of Investor Relations]

Okay. Thank you very much. And this was the last question. With this, we conclude our webcast. As always, the Investor Relations department continue to be available to answer any questions that you may have. Have a great day.